AS 10 PPE — Component Accounting: Cost Allocation and Separate Depreciation

# Component Accounting under AS 10 — Cost Allocation and Separate Depreciation

## When Does Component Accounting Apply?

When an item of PPE has significant parts (components) with different useful lives, each component must be:

• Recognised separately in the books
• Depreciated over its own useful life — not the life of the whole asset

Significance test: A component is significant if its cost is material relative to the total cost of the item.

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## How to Allocate Total Cost Among Components

All acquisition costs are pooled and then split in proportion to each component's share of the total purchase price:

$$\text{Component's Allocated Cost} = \text{Total Acquisition Cost} \times \frac{\text{Component Purchase Price}}{\text{Total Purchase Price}}$$

Acquisition cost includes: purchase price, delivery, site preparation, consultant fees, and present value of dismantling/restoration obligation.

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## Step-by-Step Approach

1. Identify significant components and their individual purchase prices.

2. Compute total acquisition cost (sum all directly attributable costs).

3. Allocate total cost using the purchase price ratio from Step 1.

4. Depreciate each component separately over its own useful life using SLM or another basis.

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## Illustrative Framework — Illus 26

Given: Plant with embedded Motors

Motor purchase price = ₹5,00,000 out of ₹30,00,000 total purchase price.

Cost Allocation:

Componentwise Depreciation — Year 1 to Year 4: